Japanese retailers reported mostly dismal first-half earnings results, with the industry stuck in a slump as shoppers remain reluctant to open their wallets even as the economy emerges from recession.

With no sales pick-up in sight, stores seem to have no choice but to continue their race to undercut rivals, with prices dropping for everything from cars to clothes to milk.

On the surface it sounds like a shopper’s paradise: Who wouldn’t mind paying less than 1,000 yen ($11) for a pair of jeans?

But it could also lead to a deflationary spiral in which consumers put off spending in hopes of further falls in prices.

And what’s more, these price cuts are slicing into already razor-thin profits at companies, which are then forced to pass on the pain to employees in the form of lower paychecks.

“It’s a death march,” said Junji Ueda, CEO of FamilyMart, Japan’s No. 3 convenience store chain.

“Manufacturers and transportation companies can’t make profits, and retail workers can’t get pay rises, or even worse, deflation will get to the point where they can’t keep their jobs.”

But some retail managers say price cuts are not hurting their businesses and there is room for even more markdowns.

“Some say we are cutting prices at the expense of profits, but such an argument is groundless. The problem is how to control inventory efficiency,” said Motoya Okada, president of Japan’s No. 2 retailing group Aeon Co Ltd, which runs the Jusco chain of supermarkets.

“Some wonder how we can sell jeans at 880 yen, but at the same time, there are many who think they are still expensive.  Recently, I visited Vietnam and was surprised to see items better than ours are sold at half our prices.”

Tadashi Yanai, CEO of Fast Retailing, maintains rivals’ efforts to undercut each other are self-destructive, although the firm’s casual-clothing chain Uniqlo is seen by some as one of the very culprits for fanning the deflationary trend with ultra-cheap apparel.

Fast Retailing is among the few Japanese retailers that have reported robust profit growth,  buoyed by strong sales at the Uniqlo stores.

“Our 990 yen jeans created value, but those that followed, like the ones for 880 yen and 850 yen, — I guess jeans will be sold for free eventually – did not produce value at all. I think our rivals will end up hurting themselves through such moves,” Yanai said.

I am a bargain hunter and always happy to pay less, but I’m just hoping my salary doesn’t decline like the prices of the goods in my shopping cart.

Photo credits: REUTERS/Issei Kato

Source: Taiga Uranaka